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Fund name: Dodge and Cox Global Stock Fund (DODWX) (Update)

Objective: The Fund seeks long-term growth of principal and income. The Fund will invest primarily in medium-to-large well established companies. D&C portfolios tend to be broadly diversified. Under normal circumstances, the Fund will invest at least 40% of its total assets in securities of non-U.S. companies (including those in the emerging markets). They look for temporarily undervalued companies. Their policy is to be fully invested, though they may hold "moderate reserves in cash or short-term fixed-income securities" from time to time. They decide whether to hedge currency exposure based on prevailing conditions, rather than by a strict policy.

Adviser: Dodge & Cox was founded in 1930, by Van Duyn Dodge and E. Morris Cox. The firm, headquartered in San Francisco, launched its first mutual fund (now called Dodge & Cox Balanced) in 1931 then added three additional funds (Stock, Income and International) over the next 75 years. Dodge & Cox manages around $200 billion, of which $150 billion are in their mutual funds. Their funds are all low-cost, low-turnover, and team-managed.

Managers: The fund is managed by a six-person team led by John Gunn, the adviserís chairman and CEO. The other team members are Charles Pohl, Diana Strandberg, Lily Beischer, Karol Marcin and Steven Voorhis. This is the first time managing a fund for Beischer and Marcin; the others share responsibility for two or more of the other D&C funds. D&C tends to hire folks shortly after graduate school and keep them on-board for decades. The managers average 15 years with Dodge & Cox and all have graduate degrees from Chicago, Harvard or Stanford.

Managementís Stake in the Fund: Every Dodge & Cox manager has an investment of at least $100,000 in each of the funds for which he or she is responsible. The senior folks (Gunn, Pohl and Strandberg) each has over a million in each fund. Beyond that, the firm is a partnership so the managers have a vested interest in its success.

Opening date: May 1, 2008.

Minimum investment: $2,500 for regular accounts, $1000 for IRA/UGMA accounts.

Expense ratio: 0.90% after an expense cap that the advisor has agreed to extend through the end of 2009. There is no redemption fee.

Comments: Analysts tend to approach Dodge & Cox with an attitude of awe and reverence. Kunal Kapoor and his Morningstar colleagues made the pilgrimage to the companyís headquarters in 2004 and came away with "An in-depth look at a model fund firm." Kiplingerís Manuel Schiffres got to interview the senior managers (2006) and penned a piece entitled "The Dodge and Cox Mystique." Marketwatchís Jonathan Burton (2008) recommended Dodge & Cox Stock as one of a handful of funds that newlyweds might own until something does them part: "Each promise shareholders some of the key vows couples make to each other: consistency, predictability, attention and conscientiousness -- qualities worth having and holding in any relationship." Chuck Jaffe Ė more noted for his scathing "Dumb Investment Idea of the Week" pieces than for succumbing to puffery Ė concludes "Dodge & Cox may well be the best fund firm in history."

The curious thing is that the adulation appears actually to be justified. Letís say you could draw up a list of all the things that you wanted in a fund company. Not just performance, but a list to encompass the whole package. For a lot of us, the list would include:

Strong absolute and relative performance: D&C has four funds, all four earn four star ratings from Morningstar. Lipper, likewise, ranks all of the funds as a four or five (on a five point scale) for "total returns" and ranks the stock-based funds as four or five for "consistent returns." The funds tend to have long stretches of peer-beating returns. Balanced, Income and Stock, for example, have each beaten their peers in nine of the past 11 years. International, with a shorter track record, won in five of its six years of existence.

Strong, stable management: D&Cís funds are all team-managed, a practice which researchers consistently link with more consistent returns and more moderate risk, the managers are co-investors in the funds and co-owners of the adviser, managers are hired directly from graduate school (or soon thereafter) and given a long apprenticeship, management turnover occurs mainly as a result of . . . well, death.

Low expenses: actually Morningstar categorizes their expenses as "very low" across the board and theyíve dropped as assets rose. Lipper made them all Lipper Leaders for low expenses.

Shareholder-friendly policies: Morningstar gives it an "A" in stewardship, describing Stock as "a model fund" and concludes "Dodge & Cox is run by long-term investors for long-term investors." The available evidence suggests high levels of shareholder loyalty, which both signals the firmís strength and helps minimize tax liabilities and transaction costs.

All of the Dodge & Cox funds suffered in late 2007 and 2008 as a result of two factors. One is fallout from the sub-prime meltdown. None of the D&C funds directly owns any of the troubled derivatives or any company central to the problem, but its investment in financials and in industrial companies with financial subsidiaries (General Electric comes to mind) hurt it. The other factor was poor performance in the health care sector, which Stock overweights. Being disciplined, the managers took the broad weakness in the sector as an opportunity to buy at depressed prices. As a result, they boosted their health care exposure by nearly 80% in recent months. Itís far too soon to say whether theyíll be vindicated Ė though Balanced, Stock and International performed excellently in March Ė but the odds are stacked strongly in favor of folks who trust D&Cís discipline.

Bottom Line: Letís be blunt about this. If this fund fails, itís pretty much time for us to admit that the efficient market folks are right and move (very quietly) into Vanguard ETFs.

Fund website: Dodge and Cox

May 1, 2008

Update (posted July 1, 2010):

Assets: $1.1 billion Expenses: 0.74%
YTD return (through 6/17/10): (2.3%)  
Our original thesis: "Letís be blunt about this. If this fund fails, itís pretty much time for us to admit that the efficient market folks are right" and give up on active management.

Our revised thesis: No change. All of the D&C funds are managed by the same large, experienced team. When that team made a collective misjudgment in 2008, it hurts all of the their funds. The team judged the meltdown to be less enduring than it was, and deployed cash vigorously into badly beaten-down financial stocks. Unfortunately, some of those stocks entered a death spiral and most rushed to the brink of collapse. Dodge and Cox Balanced, Global, International and Stock all finished in the bottom rung of their respective peer groups, tarnishing their outstanding long-term records.

Subsequently, two things happened. First, D&C made a series of strategic adjustments, including additional research staff and greater consultation with their bond fundís analysts so they made better-informed assessments of a firmís economic health. Second, they didnít back down. The firm remained fully invested (typically somewhere between 95-98%) and continued buying dominant growth companies when they were beaten down.

That discipline has paid off in the long term: Dodge & Cox Stock, for example, booked nearly 6% annual returns over the course of "the lost decade" while the major indexes remained under water. It also paid off in the short term, as all of the Dodge & Cox funds finished 2009 in the top third of their peer groups, paced by Globalís 49% return. In the 12 months following the March 2009 market low, Global would have turned a $10,000 investment into a $21,000 account Ė a return about 50% greater than its average global fund peer.

True to its nature, Global is investing where the crowd dare not go. Itís most recent portfolio shows a substantial overweight relative to its peers in European (42 versus 32% of the portfolio) and emerging markets (10 versus 6%), and a substantial underweight in the crowd favorite Asian markets (9 versus 19%). That understates the fundís commitment to the emerging markets, since the management team has explicitly targeted a number of multinational corporations whose earnings are driven by emerging marketsí consumers. In their first quarter 2010 report, they write:

[T]he global economy is in the midst of what may be one of the greatest transformations in modern history . . . fueled by the adoption of free market principles and increasing access to information and electronic communication, billions of people in the developing world are becoming active participants in a global, interconnected economy. The last time the world has seen such transformation was during the Industrial Revolution . . . and the rebuilding of Germany and Japan after World War II. The potential size of the opportunity this time is much larger . . .

The team identified Yamaha Motors of Japan as one of the key beneficiaries of the emergence of these consumers.

The management might be wrong, but theyíre willing to bet that theyíre not. Six of the seven managers have invested more than $1 million each in the fund, and 75% of the firmís trustees have invested more than $100,000 (the SECís highest reporting category) in it. With low turnover, low expenses and a world of experience behind it, itís a bet worth making.


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